21 March 2005

Budget Spin Control 1: You read some of it here first!

The budget for fiscal year (FY) 2005 is now public.

It makes for some interesting reading and I'll have more in the days ahead.

Here are a couple of interesting little things that I noticed, some of which will sound awfully familiar to those who read this blog faithfully.

One thing to make clear up front. Forget any spin that you are hearing about all this new spending being due to the new oil deal. That's a crock of the highest order. All the new spending is due to a combination of direct provincial revenues that have no connection whatsoever to the new oil deal, new federal money for health care and, well, good old fashioned deficit spending. The only new oil money that shows up in this budget is the relatively small amounts from the first two years of the deal. We haven't seen the money flying yet from the rest of the new $2.0 billion federal transfer.

1. Record increase in direct debt. Loyola Sullivan - the man who supposedly hates deficits - added more to the direct debt in one year than any other finance minister in the province's history. Over the last years of the Tobin and Grimes administrations, the province's direct debt (the amount owed directly by the provincial government) declined annually. Yes, that's right. It declined, as in went down, lessened, was reduced, got smaller, shrank.

This year alone it climbed by 10% from $6.087 billion to $6.743 billion.

There is no obvious explanation, although it is possible this may be related to government contributions to deal with the unfunded liability for some public sector pensions. If it is, then consider this an Emily Litella moment.

Loyola needs to give an answer for that one; I suspect most reporters in the budget lock-up missed it.

2. Mysterious Government focus on "cash" accounting. While in Opposition, the Progressive Conservative Party criticized government for reporting budget information on a cash basis. They claimed this hid the significant deficit in the annual budget, especially for capital spending.

The Blue Book election platform pledged to balance the current and capital account budgets by 2007-2008.

For the last two budgets, Loyola Sullivan has consistently focused on the "cash" surplus or deficit. The confusion between last year's pledge to balance the books on a "cash" basis and the Blue Book commitment is just one of the problems with Loyola's conversion to the traditional way of spinning the budget.

The other problem is that by mixing "cash" and "accrual" reporting, Loyola gets to spread some whopping great falsehoods, like the one about the Liberals causing these record high deficits. The "cash" deficit Loyola faced last year is actually less than the ones faced in the early 1990s. Loyola's "cash deficits" are actually fictional ones created by his spinning the budget numbers, rather than by an accurate reporting of the government accounts.

3. Danny loves deficits or I have money and I'm not afraid to spend it. There is a lot of small cash being spent in this budget, but there have been some other expenditures that are, well, shall we say curious.

For example, and for some currently unexplained reason, the provincial government had so much cash on hand this year that it actually spent $117 million to pay off the entire cost of building The Rooms and something called the Education Investment Corporation. If they hadn't done that, the government would have posted at least a $103 million surplus on current account instead of the $14 million deficit they are reporting on a "cash" basis.

Government predicts it will continue to run deficits on an accrual basis, as noted in a couple of posts here on Loyola's prediction the total debt load will hit $17 billion before the Tories are finished. Government is also planning run some "cash" deficits over the next couple of years even though the government books were actually in surplus this year and likely will be in surplus next year as well.

Check out the budget speech where Loyola forecasts a "cash" deficit next year of $62 million. If he carried forward his surplus from this year - even if he paid off The Rooms alone - Loyola could have had a surplus this year and balanced the books next year, thereby achieving his pledge in a single year. That doesn't even take into account his lowballing of oil revenues.

Forget the "cash" nonsense. This government plans to keep overspending by record amounts for their entire first term and beyond if re-elected despite their Blue Book commitments to tackle the debt and deficit.

Colour me disappointed.

4. Last year's budget was a crock. It looks to me like the provincial government undertook a lot of spending in the last little while to save the embarrassment of showing that their first budget was just completely out-to-lunch when it came to reporting revenues.

The provincial government was never in the financial mess Loyola and Danny claimed.

It wasn't even close.

Thank heavens these guys weren't around when things were really bad.

Like say, 1992.

5. You read it here first! In yet another example of shameless self-promotion, I have to draw attention to yet another accurate prediction from the Bond Papers. In previous posts, I predicted that offshore revenues plus offsets from the Real Atlantic Accord would be over $300 million in FY 2004 and would likely top $400 million.

Guess what?

I was dead on.

Combined royalties plus offsets last year was officially $363, 762, 000 according to Budget 2005. Add to it the other revenues the province collects under the Real Atlantic Accord and you can see we were way over $400 million. [Guesstimate the other revenues at about $ 100 million.]

But that's not all.

6. Pull the other one, Loyola. Despite having a nice chart in his budget speech that forecasts continued high oil production and continued high oil prices, Loyola Sullivan forecasts that his oil royalties will actually drop next year. Pardon me, Mr. Sullivan?

Offshore royalties, Budget 2004: $136, 970, 000
Offshore royalties, Actual 2004: $234, 420, 000
Offshore royalties, Budget 2005: $215, 370, 000

Expect next year's revenues to be at least the same as this year since everyone predicts continued high oil prices. In fact, some forecasts suggest that oil prices will be higher in future, but certainly not below US$40 per barrel. Government forecasts are apparently lowballed, using US$38 per barrel for next year and US$32 per barrel for 2006.

7. 100% is 100%. or is it? As a last point, I'll leave you with this little poser.

During the Great Crusade for the Atlantic Accord, Danny Williams eventually got around to insisting on offsetting 100% of provincial offshore revenues.

He claims he got that.

Well, let me put it this way:

Offshore royalties - not revenues - this fiscal year were around $234 million. The existing Accord offsets plus the amount agreed upon by Williams add up to $263 million. That would mean other revenues like corporate taxes added up to only $29 million.


Something isn't right there, and based on what has been happening all along with government's reporting of its oil revenues, I don't think the problem is here at the Bond Papers.

Of course, the combined amount is still $500 million, slightly more than the accrual deficit this year!

But I digress.